Time for change: China flags peak in coal usage

February 6, 2013
John Garnaut 

Time for change: China flags peak in coal usage

China’s decade-long boom in coal-driven heavy industry is about to end as the leadership shifts priorities towards energy conservation, say officials and policy advisers.

The advisers predict China’s coal consumption will peak at only a fraction above current levels after the State Council, or cabinet, last week set an ambitious new total energy use target for the five-year plan ending 2015.

“Coal consumption will peak below 4 billion tonnes,” Jiang Kejun, who led the modelling team that advised the State Council on energy use scenarios, told Fairfax Media.

“It’s time to make change,” said Dr Jiang, who is director of the Energy Research Institute under the National Development and Reform Commission (NDRC). “There’s no market for further development of energy-intensive industry.”

The imminent stabilisation of coal usage, if broadly achieved, would mark a stunning turn-around for a nation that is estimated to have burned 3.9 billion tonnes last year, which is nearly as much as the rest of the world combined.

The move would also bring some relief in the fight against global warming.

Income shock for Australia

And it would trigger a negative income shock to Australia, the world’s biggest exporter or coal and iron ore, with significant implications for government budget forecasts.

Dr Jiang said the energy targets would bite hardest with energy-intensive heavy industries such as steel - dependent on iron ore and coking coal - which he said had saturated their potential markets and could no longer make money.

Thermal coal-powered electricity generation would continue to expand at a low pace, he said.

In the first 12 years of this millennium, China increased annual coal use by a staggering 2.4 billion tonnes, or 163 per cent, accounting for more than four-fifths of global coal consumption growth.

In five years China’s net coal imports have surged from negligible levels to about 200 million tonnes, driving up the international price.

Last year China bought 19.5 per cent of Australia’s thermal coal exports worth $2.8 billion; 17.5 per cent of coking coal ($3.5 billion) and 72.5 per cent of iron ore ($38.6 billion), according to estimates by Kieran Davies, an economist at Barclays Bank.

Foreign energy analysts are mostly sceptical that China can meet its “non-binding” energy goal, pointing out that it missed its 2010 target by a large margin.

They are broadly unconvinced that the energy targets can be achieved without an intolerable drop in the GDP growth rate.

Chinese officials and analysts acknowledge that state-owned enterprises, regional leaders and their political patrons have resisted or ignored previous edicts.

'Political requirement'

But they say the economic growth is now ready to be weaned from its addiction to coal and the State Council decision - including to apportion responsibilities to local governments and enterprises - shows a stronger political consensus has been reached to mobilise the bureaucracy.

Pan Jiahua, who heads a team of climate change economists at China's leading think tank, the Chinese Academy of Social Sciences, told Fairfax Media that the State Council’s endorsement of the energy target had the effect of elevating it into a “political requirement”.

He said officials in local governments and state-owned enterprises would now be judged partly on their ability to meet energy targets while a long list of green slogans, incentives and policies were translating into concrete measures.

Professor Pan said energy security remained the primary motivation behind the measures but last month’s record pollution readings in North China had contributed to the hardening of political will.

“Chinese people have done enough tolerating such bad air,” he said.

The State Council last week set a total primary energy consumption target (including renewable energy and transport fuel) of 4 billion tonnes of “standard coal equivalent” in the five years to 2015. Confusingly, 1 tonne of actual coal equates to about 0.68 tonnes of coal equivalent, according to Dr Jiang.

With two years of the plan period already used up, the target translates to annual growth in energy consumption of about 3.5 per cent over the next three years, down from 6.6 per cent per year in the five years to 2010.

A proportion of the increase will be absorbed by hydro, wind, solar and nuclear – which are all benefiting from strong government assistance - at the expense of coal.

Officials at NDRC have been telling visiting delegations in recent days that coal consumption will peak below 4 billion tonnes and the government would do “whatever it takes” to hit the overall energy use targets.

Professor Pan predicted coal consumption would peak at less than 4.2 billion tonnes by 2015 while other global commodities markets would be hit at least as hard.

He said a continuing increase in coal-powered electricity generation would be offset by a production plateau in key heavy industries.

“I don’t think there will be further scope for expanding iron and steel production, or cement,” he said.

Professor Pan said there was no question the State Council would meet its target but he noted that  measurement methods were not robust.

“In some cases statistics may not be able to provide accurate information and some numbers may have to be estimates, which gives a certain degree of flexibility.”

Posted for Fiona